Underpayment Risks – Personal Liability and Why the Corporate Veil Provides No Protection

What is the problem?

Business people (including operational employees, directors and contractors) are often unaware of the significant personal penalties they individually face as ‘accessories’ when their organisation, or the organisation they work for, is successfully prosecuted for underpaying employees.

Historically, we have seen individuals hide behind the ‘corporate veil’ in an attempt to avoid personal liability, or worse still, abandon the organisational structure when it is overburdened with debt to later ‘re-phoenix’ the same business with a different structure. Such practices, leading to a ‘false sense of security’, are no longer sustainable. Prosecutions are going behind the corporate veil, and individuals have been firmly put on notice by the Fair Work Ombudsman (FWO) and the Courts that underpayment claims will result in personal prosecution.

How are the courts treating this?

The FWO recently took the extraordinary step of publicly warning company directors, those working in human resources management and even recruitment professionals that they face accessorial liability for workplace breaches by the organisations where they work. Statistics released by the FWO indicate that they are ‘walking the talk’. In 92% of cases they have taken against organisations, individuals have been concurrently prosecuted as accessories to the breach.

The recent Federal Circuit Court case of Fair Work Ombudsman v Step Ahead Security Services [2016] FCCA 1482 indicates the courts will show little mercy against individuals involved in contraventions by their organisation.

This case involved underpayments totalling $22,779 to a number of employees arising out of a failure to pay penalty rates, overtime, casual loadings and shift payments/allowances.

In addition to the company being fined $257,000, the owner of the business was: ordered to re-pay the $22,779 in underpayments to his employees; fined $51,400 for the contravention; and restrained him from underpaying security industry workers in the future.

Last year the FWO initiated proceedings against a third party accountancy firm as an accessory where the firm was allegedly involved in processing wage payments for workers at a fast food establishment and allegedly had explicit knowledge that the pay was below the award rate.  Stay tuned for further updates on this significant prosecution, which is another example of the expanding reach the FWO in this area.

What can you do to control your legal risks?

To mitigate your risks of accessorial liability, individuals and businesses should:

  • Take the time to accurately understand minimum entitlements – with the wealth of information and tools available regarding minimum pay rates on the FWO and other industrial/employer association websites, there is little excuse for not understanding this threshold area of employment.  You cannot afford to be ‘wilfully blind’;
  • Utilise appropriate documents and set off clauses – you cannot contract out of the minimum entitlements even where an employee consents to such an arrangement.  Where seeking to ‘bundle’ or create ‘flat hourly rates’, businesses need to have a Fair Work Australia (FWA) approved enterprise agreement.  Annualised salaries may be permitted without an enterprise agreement, but only where the minimum entitlements have been otherwise met and the payment arrangements are provided for with an appropriate ‘set off’ clause;
  • Make further informed enquiries if involved as a third party provider in the ‘supply chain’ to a business who is providing labour – seek ‘up front’ assurances or other forms of confirmation that the business has assessed and is meeting/exceeding the minimum entitlements required to be paid to employees.  Ask for FWA certified copies of enterprise agreements or even check the Modern Awards yourself against any calculations provided to you;
  • Take advice – from a workplace relations specialist upfront before entering into a specific relationship involving payroll matters, particularly in relation to highly technical areas such as determining appropriate award coverage and classifications;
  • Train your personnel – involved in payroll matters to remain ‘current’ in their skill-set and to maintain vigilance in this area;
  • Continue to perform audits – on your existing contractual obligations and be prepared to remedy/make changes where errors/risks are identified; and
  • Cooperate with the FWO if a complaint or investigation is made – because your conduct and approach in this initial investigatory stage will be critical in determining whether the FWO chooses to prosecute or not.  Where back-payments are required, we recommend you do them as soon as possible and take steps to proactively ensure that such contraventions do not occur again.

If you have any queries or would like further information, please contact:

Joe Mullavey
M: 0416 794 061
E: jmullavey@pageseager.com.au

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